How to reap the rewards of the residential property market

Institutional investment in housing is booming. What influence will these long-term investors have on prices and what challenges do they face in 2022 and beyond?

Institutional landlords are buying residential real estate at unprecedented levels.

Purchases in Europe alone reached EUR64bn (GBP53bn) in 2020, with about EUR150bn worth of housing stock estimated to be in the hands of large investors, including pension funds, infrastructure funds and insurance companies.

These long-play investors are increasingly shifting away from commercial property such as office space, retail, hospitality and care homes.

This approach not only buffers the reduced demand for commercial space caused by the Covid-19 pandemic, but takes advantage of the predictability of rental revenues in the residential property market.

Institutional landlords offer several advantages to the residential property market. They want to provide societal benefits in line with their ESG values. Their long-term capital approach can adjust to housing and mobility trends. They must also adhere to the latest government-led policies.

Rising house prices and institutional landlords’ reputation

UK residential property valuations soared at the height of the Covid-19 pandemic as demand for larger homes and green space exceeded housing stock. A temporary stamp-duty holiday for properties valued under GBP500,000 also stimulated deal closings and prices.

This means property ownership in the UK is no longer affordable for an increasing number of people in their 20s and 30s. Young professionals and growing families are having to rent for longer, with many relying on generational wealth to fund house deposits.

In some locations in Europe there has not been meaningful institutional investment into the residential sector. This influx of capital should have the benefit of well run and regulated landlords taking a long term view of the investment. A further benefit being investors are targeting different segments of the market leading to an increase of supply that is not focussed on certain locations or types of stock.

How can institutional landlords decrease risk in residential real estate?

Diversification in any asset class lessens the risk of overexposure to any one type of housing stock or location.

Some institutional landlords will lean towards a specific outsourced rental or mixed ownership model if it has proven successful in another market, but must adapt to local dynamics to minimise risk. Other investors may acquire a housebuilder to have an inside influence on housing stock trends.

Some large-scale institutional landlords are looking to affordable housing such as build-to-rent, rent-to-buy and shared equity, which will provide further portfolio diversity.

Others want to “sell a lifestyle” – a popular trend in North America that offers amenities such as golf and sporting facilities, communal cinema rooms, on-site restaurants and laundry services.

However, “amenity rich” offerings may present risk if prospective tenants feel they would be paying for something they don’t use or could find a better option elsewhere.

To reduce risk, investors must adapt with the times and keep asking questions:

• Are rental prices in check?
• Will the needs of young professionals, families and pensioners today be the same in 10 years’ time?
• Can amenity access be optional and charged accordingly?
• Is it greener to build from pre-existing stock and urban mining (reclaimed building materials) or to construct a “zero-carbon” newbuild from scratch?
• How can green mortgages and our ESG policies work if we don’t understand the true environmental footprint of our housing stock both old and new?

How to manage housing portfolios in a complex world

Institutional landlords are doing their best to adapt to both historical and changing housing and lifestyle trends.

For example, in continental Europe, institutional landlords have been a staple supplier of properties in the rental market and this will continue. In the US, this used to be predominant in cities. Now it’s changing thanks to the greater acceptance of remote working.

In the UK, home ownership used to dominate the real-estate sector. But that too is changing as affordability for younger generations and the increased desire for mobility of the population means demand for renting is growing.

Institutional landlords are investing more in the UK residential property market for a variety of reasons:

• Property valuations are rising as more urban dwellers move to larger, less expensive properties in the countryside and city outskirts.
• Interest rates remain relatively low, yet rising.
• Purpose-built properties no longer have to take a cookie-cutter approach, but can cater to a variety of resident needs and lifestyle trends.
• US and European investors who have invested in the UK since the pandemic have reported good returns on their investments so far.

Continual changes to regulations make cross-border real estate more complex. Investors must master foreign tax laws, regulation, language and even cultural cues to secure an effective deal.

The Covid-19 pandemic has added an additional layer of complexity – slowing real-estate activity across the board and restricting foreign travel.

That is why it is common for investors with sizeable assets across multiple jurisdictions to outsource these activities to an international administrator and a single point of contact.

Intertrust Group’s real-estate team will be at Mipim this month to discuss these trends.

Why Intertrust Group?

• Vertical integration: we can assist with establishing and administering real-estate structures for all types of institutional investors.
• Technical expertise: we can support you with technical and practical expertise in real-estate financing and acquisition structures.
• Global presence: we can take care of your cross-jurisdictional needs.
• ESG data benchmarking: Intertrust Group can help you navigate the complexity, to become ‘ESG ready’ through its Fast Track system.
• Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.